An Employee Ownership Trust (EOT) is a trust that enables a company to become owned by its employees.
It allows company owners to sell their business to a trust which is operated for the benefit of its employees, without requiring immediate changes to the management structure.
EOTs were introduced by the Finance Act 2014, to encourage wider employee ownership and after a relatively slow start, they have grown in popularity in recent years – the recent increases in Capital Gains Tax (CGT) rates have made them even more attractive to business owners.
What are the tax breaks associated with Employee Ownership Trusts?
For many business owners, an EOT creates two tax breaks:
- CGT relief for owners of companies selling the shares of their trading company into a trust set up for the benefit of the company’s employees; and
- Once a company is owned by an EOT, it can pay annual bonuses to its employees free of income tax up to £3,600.
What are the conditions for setting up an Employee Ownership Trust?
There are a number of conditions that need to be met to sell your business to an EOT and access the tax breaks, but the main conditions are:
- The company should be a trading company or own a trading group of companies;
- The trust must hold more than 50% of the shares in the company;
- Where employees receive any benefit from the trust, they must all be included and on the same terms.
- The trustee(s) must be UK resident.
- The trustee(s) must be independent of the selling shareholders (i.e. selling shareholders cannot control or have access to greater than 49% control of the trustee.
- A valuation of the company being sold must be undertaken to ensure that market value is being paid.
What are the benefits of an Employee Ownership Trust?
In addition to the tax breaks, benefits for the business owner include:
- You will receive a fair market value for your shares as they will be independently valued;
- Transaction expenses are usually much lower;
- The time to complete is generally less compared to third-party sales and you can implement at a pace to suit your needs;
- You can be involved in building a new leadership team;
- The company remains independent, leaving you to create an enduring legacy.
Benefits for the employee include:
- Bonus payments of up to £3,600 per employee per annum are exempt from income tax (employee and employer NICs still apply);
- Qualifying employees will share in the proceeds of any future company sale;
- It can provide long-term stable ownership which can preserve jobs;
- Employees have a say in how the business is run, making them more motivated and committed;
- There needs to be minimal disruption to the business from the changes in staffing and management.
EOTs and the Autumn 2024 budget
It’s worth mentioning here that as part of the 2024 budget, the government introduced a package of reforms to the taxation of EOTs.
The reforms were aimed at strengthening the EOT framework, preventing opportunities for abuse and ensuring that the regime remains focused, as intended, on encouraging employee ownership and rewarding employees.
Should you consider an Employee Ownership Trust?
EOTs can provide an attractive business solution, especially given the increase in CGT rates and changes to IHT and BPR.
If you are a business owner who is looking to sell your business, an EOT could be a good alternative option to a trade sale as it places the business in the hands of the people who already work there and understand the business and what it stands for.
If you would like more information on EOTs, the mechanics of putting one in place or help assessing whether employee ownership is right for your business, please get in touch.
